Monday, April 23, 2012

Arcapita bankruptcy update

In the latest week's newsletter (sign up for the newsletter on the right side of the blog; an archive is available on my website), I included a summary of some of the latest developments in the Arcapita bankruptcy case[1].

Arcapita’s
bankruptcy case is ongoing and a recent objection by Standard Chartered, which provided
$100 million of murabaha financing to Arcapita in 2011, presumably to finance
the company through its anticipated debt restructuring of the $1.1 billion
murabaha whose imminent maturity led the company into bankruptcy.

The
objection by Standard Chartered is based on the potential, according to
Standard Chartered, for Arcapita to make inter-company transfers of dividends
that should be held for Standard Chartered due to its mortgage on the equity of
a number of Arcapita subsidiaries.Standard Chartered, in a court filing, described that “if the value of
the Subsidiary Guarantors, which is at best uncertain, is transferred to AIHL [Arcapita’s
Cayman Islands holding company] or Arcapita Bank, Standard Chartered’s security
interests could be rendered worthless and the Subsidiary Guarantors could
impermissibly be rendered insolvent to the detriment of Standard Chartered”.

Standard
Chartered is asking the court to make the approval of any budgets the court is
presented with by Arcapita require approval by Standard Chartered as well.More concerning for the unsecured murabaha
holders, the senior position of Standard Chartered means Arcapita will have to
come up with more money before lower priority murabaha creditors get paid.

In
another document filed with the bankruptcy court, Barclays Bank, which is on
the committee of unsecured creditors, has asked the court permission for its
affiliates to trade claims on Arcapita’s debt, as long as it separates those
trading activities from its position as a committee member to avoid potential
conflicts of interest.

As
I mentioned in an earlier
blog post,
is the fact that the murabaha financing is being traded (and the trading is
unlikely to occur at par).Yet, there
has been much less controversy about this than about the potential for the
Goldman sukuk to be traded since it was listed on the Irish Stock Exchange
(even though it was never likely to trade).

There are a few filings so far this week including two (pdf 1, pdf 2) requesting an extension of the time Arcapita has to file its financial statements to June 21, 2012, from the previously extended deadline of May 3, 2012. In their filings, Arcapita cite a need to consider "nuanced legal issues[...], in particular, payments and distributions to and from insiders and other affiliates". They also cite as a source of delay, "the Shari’ah-compliant nature of the Debtors’ investments requires a thorough analysis of some of the characterizations required by the Schedules and Statements"

Another filing, this one from Commerzbank (pdf), asks the court to grant a relief from the automatic stay to allow Commerzbank to serve a notice of default on profine GmbH, a portfolio company of Arcapita that manufactures PVC window frames, on a Euro125 million murabaha line of credit (guaranteed by Arcapita), which profine defaulted on a week before Arcapita filed for bankruptcy. Under the murabaha (the total amount outstanding is not specified in the filing, but is described as "principal plus unpaid profit"), Commerzbank could only exercise the guarantee once 14 days passed after the default. Commerzbank argues that delivering a claim notice to Arcapita is only a ministerial act designed to perfect and crystallize Commerzbank's claim, and therefore it would fall outside of the automatic stay. It is unclear whether the default was related to funding problems at Arcapita, but profine announced a management change on February 24, weeks before defaulting on the murabaha (followed of course by Arcapita's bankruptcy filing).

[1] Note: I am not a lawyer, so this post represents my opinion from reading the court filings.

Have I missed a development in Islamic finance you think is important? Let me know by emailing me at blake@sharingrisk.org.

DISLAIMER:

The opinions expressed on this blog are mine alone, and do not represent the opinions of any institution with which I am affiliated. The opinions expressed should not be taken as a recommendation or offer to buy or sell any securities, nor is it personalized investment advice. This blog has been derived from information considered reliable, but I do not guaranteed its accuracy or completeness. Any links are for informational purposes only and they have not been reviewed for accuracy.